A Yen for Revaluation

International finance was dominated last week by a Pirandellian discussion of a statement that everyone solemnly insisted had never been uttered. The alleged non-remark was a request that Japan increase the value of the yen, and it supposedly was not made by U.S. Assistant Secretary of State Philip Trezise at an informal meeting of U.S. and Japanese government officials at Lake Kawaguchi near Tokyo.

In fact, Trezise did say it. But when the news leaked, he told a press conference that of course he would not presume to advise a foreign government what its money should be worth--even though, in his personal view, "the yen is an undervalued currency." The Japanese were incensed, but went along with the pretense. At a televised news conference, Prime Minister Eisaku Sato looked uncharacteristically menacing as he complained that "there could not have been a more outrageous case of interference in domestic matters." Later, however, Finance Minister Takeo Fukuda added that for that very reason, he could not believe so experienced a diplomat as Trezise would commit such a faux pas.

Artificial Insulation. This little word game masks a situation of the utmost seriousness. Japan's booming economy, multiplying exports and more than $6 billion in foreign-currency reserves have made a mockery of the yen's official value of little more than a fourth of a U.S. cent. The Japanese are understandably pleased with this situation, but their trading partners are furious. An undervalued currency gives Japanese goods an exaggerated price advantage in foreign markets; Toyota and Datsun cars, Nikon cameras and Sony TVs, for example, all cost less in the U.S. than they would if the yen had a higher dollar value. Last month's international monetary crisis strengthened this Japanese advantage by triggering increases in the values of several European currencies, notably the West German mark. The mark has been left free to find its own price in currency trading; if its value continues to rise, as it has so far, the dollar price of German products, like Volkswagens, that compete with Japanese exports will eventually go up, too.

Foreign governments resent this artificial advantage--and none more bitterly than the U.S. Government, since the country has run a deficit of more than $1 billion in each of the past two years in trade with Japan. That irritation is fanned by the thought that Japan is largely insulated from the natural financial pressures that have forced increases in other undervalued currencies. Treasurers of international corporations and money speculators cannot pour funds into Japan--as they did into Germany last month when they correctly expected the mark to rise--because the Japanese government tightly controls the exchange of yen for foreign currency.

Lacking a means of exerting financial pressure, the Nixon Administration seems to have decided to apply political pressure. In addition to Trezise's remarks, U.S. officials last week inspired newspaper stories that the Administration is considering imposing a special tariff on all Japanese products in order to offset the undervaluation of the yen (which some high officials calculate is 20% below its prospective free-market value) or stopping Export-Import Bank financing of exports to Japan. That move could cut shipments of some U.S. raw materials, such as coal and lumber, that the Japanese badly need.

Grating Noise. To officials in Tokyo, those threats seemed too draconian to be believed. A special U.S. tariff lasting until the yen was revalued enough to please Washington would amount to an unprecedented and almost unimaginable action; the U.S. would be attempting to blackjack a friendly nation into fixing a value for its money that Washington in effect would decide. Finance Minister Fukuda dismissed that talk as a zatsuon (grating noise). A Tokyo banker added that the idea of cutting U.S. shipments of raw materials to Japan was "reminiscent of the eve of Pearl Harbor, when the Roosevelt Administration placed an embargo against shipping scrap iron and oil to Japan. Nobody on either side of the Pacific," he said, "would be idiot enough to wish for a replay of that, except on the screen." Officially the Japanese line remained as stated recently by Fukuda: "In no corner of my brain is there any thought of revaluing the yen."

Outside the government, however, more and more Japanese are coming to recognize that the nation cannot forever maintain a patently undervalued currency and continue to enjoy relatively free access to foreign markets, particularly to the U.S. Tokyo economists reluctantly concede that a 5% yen revaluation is likely by this fall, or perhaps sooner, and some businessmen are beginning to act as if it were inevitable. Japanese shipbuilders, for example, are demanding that foreigners signing contracts for oil tankers agree to pay in yen, rather than in foreign currencies that may be worth fewer yen by the time the ships are delivered. Automakers are discussing posting an immediate 5% increase in export prices in order to get the pain of yen revaluation over with even before it becomes fact.

Bluff and Reality. Such moves are only a recognition of reality. The Nixon Administration last week may have been indulging in inept bluffing, but the fact that so drastic an idea as a special U.S. tariff on Japanese goods could even be discussed illustrates how dangerously monetary imbalances are fanning political bitterness and protectionist sentiment round the world. The undervaluation of the yen is now by far the greatest of those imbalances. The sooner a revaluation of the yen comes, and the bigger it is, the better.

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